Regressive Tax

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What is a 'Regressive Tax'

A regressive tax is a tax that takes a larger percentage of income from low-income earners than from high-income earners. It is in opposition with a progressive tax, which takes a larger percentage from high-income earners. A regressive tax is generally a tax that is applied uniformly to all situations, regardless of the payer.

BREAKING DOWN 'Regressive Tax'

A regressive tax affects people with low incomes more severely than people with high incomes. While it may be fair in some instances to tax everyone at the same rate, it is seen as unjust in other cases. As such, most income tax systems employ a progressive schedule that taxes high earners at a higher percentage rate than low earners, while other types of taxes are uniformly applied. Examples of regressive taxes include sales taxes, user fees and, arguably, property taxes.

Sales Tax

Governments apply sales taxes uniformly to all consumers based on what they buy. Even though the tax may be uniform (such as 7% sales tax), lower-income consumers are more affected by it.

For example, imagine two individuals each purchase $100 of groceries per week, and they each pay $7 in tax on their groceries. The first individual earns $2,000 per week, making the sales tax rate on her groceries 0.35% of income. In contrast, the other individual earns $320 per week, making her grocery sales tax 2.2% of income. In this case, although the tax is the same rate in both cases, the person with the lower income pays a higher percentage of income, making the tax regressive.

User Fees

User fees levied by the government are another form of regressive tax. These fees include admission to government-funded museums and state parks, costs for driver's licenses and identification cards, and toll fees for roads and bridges.

For example, if two families travel to the Grand Canyon National Park and pay a $30 admission fee, the family with the higher income pays a lower percentage of its income to access the park, while the family with the lower income pays a higher percentage. Although the fee is the same amount, it constitutes a more significant burden on the family with the lower income, again making it a regressive tax.

Property Taxes

Property taxes are fundamentally regressive because, if two individuals in the same tax jurisdiction live in properties with the same values, they pay the same amount of property tax, regardless of their incomes. However, they are not purely regressive in practice because they are based on the value of the property. Generally, it is thought that lower income earners live in less expensive homes, thus partially indexing property taxes to income.

Flat Tax

Often bandied around in debates about income tax, the phrase "flat tax" refers to a taxation system in which the government taxes all income at the same percentage regardless of earnings. Under a flat tax, there are no special deductions or credits. Rather, each person pays a set percentage on all income.